I'm wondering what's the best thing to do, whether to invest in stocks or pay towards my mortgage. Looking for suggestions. Thanks.
I'm wondering what's the best thing to do, whether to invest in stocks or pay towards my mortgage. Looking for suggestions. Thanks.
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Look into investing: it takes 7.2 years to double money at 10% gain a year. You could 16x your money with relatively safe investments.
Or you double every 10 years at 7.2% yearly gain. Again, you'd do 8x your investment in the 30 year period.
You're not trying to hit it out of the park, but vanguard's should get you these returns yearly. Over 30 years it goes a long way.
1. Assuming a fixed rate mortgage for simplicity, let’s say your interest rate is 5%. This is 100% certain (if it’s variable, you’d have to assume a number and a probability). So the return here is 5%. Depending on your tax situation, it might be lower if you can deduct (some of) the interest you pay - in which case, keeping the mortgage might be more convenient. Let’s say your mortgage costs you 4.5%, then, factoring in the tax savings (which you’d have to calculate yourself)
2. You’d need to calculate the expected return on the investment you’ll make. Let’s say you are 70% confident that you’ll get a 10% return in the next year. Your expected return is 7% (.7 * .10).
In the example above, you’re better off investing in the stock market.
However, it’s all about what you expect your ROI from the stock market to be. In 2017, the US stock market grew by a lot, and investing was definitely a better option. In 2018, it has slowed down and it depends on what you invest.
This method above assumes that you’re acting in a perfectly rational way (what economists call a “homo economicus”). What isn’t included is the risk, and how you feel about carrying it. Investing in the stock market has a higher risk, and so you might feel better by choosing the safer option of repaying your mortgage.
A way of reflecting that in the calculation is by altering the probabilities and seeing what is the minimum probability that still grants a positive return, and seeing if you feel comfortable with that. In the example above, investing in the stock market is the best approach as long as the probability of getting a 10% return is higher than 45%. Does that make you feel comfortable?
Of course, you must run your own numbers.